RBI asks banks to settle part of trade deals with UAE in rupee or dirham

Move to fix rate for dirham-rupee pair directly

MUMBAI: The Reserve Bank of India (RBI) has taken a significant step to promote the use of the Indian rupee in international trade by instructing banks to settle a portion of their trade transactions with the United Arab Emirates (UAE) in either the Indian rupee or the UAE dirham.

Banks have also been asked to regularly report the extent of these payments to the RBI. However, no specific targets have been set by the central bank for these settlements.

This directive builds upon an earlier encouragement in 2023, following Prime Minister Narendra Modi’s visit to the UAE, where banks were urged to facilitate such payments.

Strategy to boost trade settlements in rupees

The move is part of India’s broader strategy to boost trade settlements in rupees and reduce dependency on the U.S. dollar—a challenge that many countries have faced, given that nearly half of global trade is conducted in dollars, according to the Bank of International Settlements.

In addition to promoting rupee-dirham settlements, the RBI is reportedly in renewed discussions to establish a mechanism for expanding local currency trade with Russia. Last year, Reuters reported that Indian refiners had started paying for most of their Russian oil purchases through Dubai-based traders in dirhams instead of dollars.

India’s third-largest trading partner

To foster the development of a rupee-dirham market, the RBI has advised banks to first seek “a matching flow” in dirhams from another bank when making payments to the UAE. This would involve obtaining a rate for the dirham-rupee pair directly from another bank, rather than converting rupees to dollars and then to dirhams through the market.

The UAE is India’s third-largest trading partner, with annual trade valued at approximately $83 billion in the 2023-24 financial year, including over $17 billion in oil and related imports by India. While banks and their clients appear willing to adopt this new mechanism, the process is still in its “nascent stage,” according to a senior banker familiar with the situation.